Rupee roars back on RBI's support, up most in seven months

Rupee

India's central bank stepped in forcefully to support the rupee, propelling it to the biggest gain in seven months in a move that some analysts said was intended to punish those betting on a one-way slide in the currency.

The rupee rose as much as 1%, the most since May 23, to 90.0963 on Wednesday, after closing at a record low in the previous session. The Reserve Bank of India intervened through dollar sales in the local market, according to people familiar with the transactions.

The move follows the rupee’s string of record lows in recent weeks, which had sparked debate over why the RBI hasn’t stepped in more forcefully to support the currency. Traders said the authority likely intervened after it bought $5 billion of dollars via a foreign-exchange swap on Tuesday.

“There was a sense that the market was taking the rupee’s rapid depreciation lightly, and today the RBI has come back aggressively to dispel that view,” said VRC Reddy, head of treasury at Karur Vysya Bank Ltd. He said the central bank sold dollars around the 91 level.

The rupee closed 0.7% higher at 90.3775 per dollar on Wednesday, after hitting an all-time low of 91.0837 on Tuesday.

Wednesday’s moves brought back memories of forceful dollar sales by the RBI in October, when it acted to quell speculation that was building against the rupee. Given the currency’s rapid decline over the past few days, one-sided expectations of rupee weakness were building up again, according to Dhiraj Nim, FX strategist at Australia and New Zealand Banking Group.

The central bank has been guarded about its intervention strategy and goes to lengths to ensure that market participants don’t have signs of when it may step in. The unpredictability maximizes the impact of the RBI’s dollar sales — the local currency has gained around 1% on each of the last few instances of strong intervention.

RBI’s intervention in currency markets is enough to draw a line in the sand against undue rupee speculation for now. The moves should drive home the message that the adjustment is complete around current levels — meaning no further material declines may be needed from here — Ven Ram, cross-asset strategist.

Wednesday’s aggressive intervention has eased pressure on the rupee for now, though analysts do not expect the currency to gain much further until a US trade accord is finalized.

“While the central bank may be able to stall the depreciation pressure, it is clearly not going to put up a strong defense at any particular levels,” said Sakshi Gupta, principal economist at HDFC Bank Ltd. The rupee could again move toward the 91-per-dollar level by mid-January, she added.

Before today’s jump, the rupee was down almost 2% this month as foreign outflows from local stocks and bonds due to delays in finalizing a trade deal with Washington dented sentiment.

Global funds have pulled about $18 billion from local equities this year. The withdrawals have worsened the strain on the rupee while the 50% US tariffs threaten exporters’ dollar inflows. At the same time, firm imports are keeping demand for the greenback elevated.

The central bank’s action will cause an unwinding of speculative positions for now, said Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors.